FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended April 30, 1995
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16566
VARITRONIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1442400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Interchange North
300 Highway 169 South
Minneapolis, Minnesota 55426
(Address of principal executive offices) (Zip Code)
612-542-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No
On June 9, 1995 there were 2,326,820 shares of the registrant's $.01 par value
common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1: Financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(UNAUDITED)
APRIL 30, 1995 JULY 31, 1994
<S> <C> <C>
Current assets:
Cash $ 299,151 $ 209,844
Accounts receivable, net 9,599,982 8,902,523
Inventories:
Finished goods 4,423,525 4,935,609
Raw materials and component parts 8,650,422 6,801,194
Total inventories 13,073,947 11,736,803
Other current assets 1,114,983 826,322
Total current assets 24,088,063 21,675,492
Property and equipment, net 4,699,754 4,264,098
Total assets $28,787,817 $25,939,590
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $ 5,200,000 $ 3,000,000
Accounts payable 3,004,046 2,992,734
Accrued liabilities 1,054,595 1,216,335
Total current liabilities 9,258,641 7,209,069
Stockholders' equity:
Common stock, $.01 par value,
10,000,000 shares authorized;
2,326,820 and 2,408,123 shares
issued and outstanding 23,268 24,081
Additional paid-in capital 207,391 -
Retained earnings 19,298,517 18,706,440
Total stockholders' equity 19,529,176 18,730,521
Total liabilities and
stockholders' equity $28,787,817 $25,939,590
</TABLE>
See accompanying notes to unaudited consolidated financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
APRIL 30, APRIL 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $12,331,941 $11,064,181 $36,318,384 $33,308,474
Cost of sales 8,088,160 6,830,351 23,215,886 20,419,493
Gross margin 4,243,781 4,233,830 13,102,498 12,888,981
Operating expenses:
Marketing and sales 1,733,541 1,721,606 4,727,016 5,059,298
General and administrative 1,330,129 1,577,761 4,004,224 4,492,693
Product development 752,395 515,569 1,893,536 1,684,736
Total operating expenses 3,816,065 3,814,936 10,624,776 11,236,727
Income from operations 427,716 418,894 2,477,722 1,652,254
Other income 801 381 8,693 1,164
Interest expense (80,941) (29,393) (233,485) (38,159)
Income before income taxes 347,576 389,882 2,252,930 1,615,259
Provision for income taxes 110,000 125,000 740,000 550,000
Net income $ 237,576 $ 264,882 $ 1,512,930 $ 1,065,259
Net income per share $.10 $.10 $.65 $.40
Weighted average common
shares outstanding 2,325,000 2,625,000 2,318,000 2,657,000
</TABLE>
See accompanying notes to unaudited consolidated financial statements
VARITRONIC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30,
<S> <C> <C>
OPERATING ACTIVITIES: 1995 1994
Net income $ 1,512,930 $ 1,065,259
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,247,648 857,735
Provision for inventory valuation allowance 125,000 25,000
Provision for uncollectible accounts receivable 48,820 234,168
Changes in operating assets and liabilities:
Accounts receivable (746,279) (433,953)
Inventories (1,462,144) (699,858)
Other current assets (288,661) (160,588)
Accounts payable 11,312 655,074
Accrued liabilities (161,740) (298,504)
Net cash provided by operating activities 286,886 1,244,333
INVESTING ACTIVITIES:
Additions to property and equipment (1,683,304) (2,099,405)
Net cash used by investing activities (1,683,304) (2,099,405)
FINANCING ACTIVITIES:
Borrowings under line of credit 5,200,000 4,500,000
Repayments under line of credit (3,000,000) (2,500,000)
Repurchase of common stock (921,969) (1,281,000)
Proceeds from sale of common stock under
incentive stock option plan and
employee stock purchase plan 207,694 163,282
Net cash provided by financing activities 1,485,725 882,282
Net increase in cash 89,307 27,210
CASH AT BEGINNING OF PERIOD 209,844 334,728
CASH AT END OF PERIOD $ 299,151 $ 361,938
</TABLE>
See accompanying notes to unaudited consolidated financial statements
VARITRONIC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Consolidated Financial Statements:
The unaudited consolidated financial statements as of April 30, 1995, and
for the three and nine months then ended, reflect, in the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position and results
of operations for the interim periods. The unaudited consolidated interim
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's report on
Form 10-K for the year ended July 31, 1994.
2. Share Repurchase:
The Board of Directors approved a resolution at its May 16, 1995 meeting
authorizing the Company to purchase up to 300,000 shares of its common stock
on the open-market or in privately negotiated transactions.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Net sales increased to $12,332,000 in the third quarter of fiscal 1995 compared
to net sales of $11,064,000 in the year-ago period, an increase of $1,268,000 or
11.5 percent. Machine sales increased by 19.8 percent and supply sales increased
by 6.7 percent from the year-ago third quarter. Sales of the PosterPrinterTM
product line increased by 20.6 percent from the third quarter of fiscal 1994,
and represented 36.7 percent of current quarter net sales. Approximately 75
percent of PosterPrinter machines sold domestically were equipped with a
ProLynxTM computer interface. The ProImage PosterPrinter machines sold with a
ProLynx retail for $3,995, compared to a $3,495 retail price for machines sold
without a ProLynx. The Company launched the EasyStepTM 2500 labeling machine,
the industrial market version of the ProPartnerTM, in the current year third
quarter. Sales of the EasyStep 2500/ProPartner product line were approximately
$800,000 in the current quarter. EasyStep 4000 product line sales increased by
7.5 percent from the third quarter of a year ago, and represented 24.5 percent
of current quarter sales, despite a significant decrease in sales of EasyStep
4000 supplies to a major distributor due to a change in the distributor's
inventory management policy. The Company expects sales of EasyStep 4000 supplies
to return to the levels of prior quarters in the fourth quarter of fiscal 1995.
International sales increased by 58.4 percent from the third quarter of fiscal
1994 due to increases in EasyStep 4000 and PosterPrinter product line sales.
The Company announced a new product, the VintageColorTM printing system in the
current year third quarter. The Company exhibited the printing system at a
domestic trade show in March, and at a European trade show in early May. The
VintageColor is a wide format, full-color printing system which produces output
in 24 or 36 inch widths up to 100 feet long. The VintageColor system includes an
inkjet printer, raster image processor software, and other options including a
pre-configured color server, color calibrated scanners and a variety of print
media and inks. The Company expects sales of this product in the fourth quarter
of the current fiscal year.
Net sales for the nine months ended April 30, 1995 were $36,318,000 compared to
net sales of $33,308,000 for the nine months ended April 30, 1994, an increase
of $3,010,000, or 9.0 percent. Sales of the EasyStep 4000 product line increased
by 38.2 percent from last year, while sales of the PosterPrinter product line
increased by 19.5 percent between the comparable periods. International sales of
these two product lines increased significantly between the nine month periods
resulting in a 22.3 percent increase in international sales for the nine month
comparative periods. Current year nine month sales of the EasyStep
2500/ProPartner product line, launched during the current fiscal year, were
$1,386,000. Sales of the Company's mature product lines decreased by 23.7
percent from the year-ago period. This decrease is consistent with Company
expectations.
Gross margin was 34.4 percent and 36.1 percent for the quarter and nine months
ended April 30, 1995 compared to 38.3 percent and 38.7 percent in the comparable
periods last year. In the current quarter, overall production volumes declined
due to the short-term volume adjustment for the EasyStep 4000 supply sales as
noted above. The decreased production levels resulted in unabsorbed burden and
direct labor costs which increased cost of goods sold. Machine margins decreased
from last year due to lower margins on PosterPrinter machine sales.
PosterPrinter machines and supplies are imported from Japan, and are purchased
using Japanese yen. On a year-to-year comparison, the decreased value of the
U.S. dollar against the yen increased the cost of these imported products. The
current dollar weakness against the yen will further increase the cost of these
products in the future. The Company enters into foreign exchange contracts to
hedge inventory purchase commitments denominated in Japanese yen. Supply margins
were consistent for all of the comparable periods.
Operating expenses were $3,816,000 and $10,625,000 in the current quarter and
nine month period, respectively, compared to $3,815,000 and $11,237,000 for the
comparable periods in the prior year. Overall marketing and sales expenses were
comparable from the year-ago quarterly level. However, media and promotional
expenses decreased as the Company changed its promotional and advertising
programs. These expense reductions were offset by costs incurred to introduce
the Company's newest product, the VintageColor printing system. General and
administrative expenses decreased by $248,000 in the current year third quarter
compared to the third quarter last year. The prior year third quarter included a
bad debt provision of $237,000 due to the bankruptcy filing of a major domestic
dealer. Current quarter product development expenses increased to $752,000 from
$516,000 one year ago primarily related to supply development projects and
software development for the new VintageColor printing system. Operating
expenses for the nine month period decreased by $612,000 from the year ago
levels. In addition to the items noted above, prior year operating expenses
included $250,000 incurred in connection with acquisition discussions with Kroy,
Inc. which were terminated in December 1993. These costs were included in
general and administrative expenses.
Interest expense totaled $81,000 for the current quarter, and $233,000 for the
current nine month period. Current year average daily borrowings under the
Company's $10,000,000 revolving line of credit were approximately $3,853,000.
The Company provided for income taxes at a 31.6 percent and 32.8 percent rate
for the current quarter and nine months compared to an effective tax rate of
32.1 percent for fiscal 1994. The current period tax rate includes an increased
benefit from the research and experimentation tax credit.
LIQUIDITY AND CAPITAL RESOURCES:
Cash was $299,000 at April 30, 1995 compared to $210,000 at July 31, 1994. Cash
provided by operations was $287,000 for the current nine month period compared
to cash provided by operations of $1,244,000 last year. The decrease in the
current year was due to several items including an increase in inventory of
$1,337,000 which was comprised mainly of the EasyStep 4000 and the EasyStep
2500/ProPartner product lines. Accounts receivable increased due to an increase
in international receivables which are generally given longer payment terms.
Cash provided by operating activities also included an increase in net income of
$448,000, and an increase in non-cash items of $305,000. Property and equipment
additions under investing activities were $1,683,000 compared to $2,099,000 last
year. Current year additions included leasehold improvements, furniture and
fixtures for a new leased facility which houses personnel working on the
VintageColor and PosterPrinter products. There were also fixed asset additions
for test and training equipment to support the new product. Prior year fixed
asset additions were mainly specialized tooling for the EasyStep 2500/ProPartner
product line. Net cash provided by financing activities was $1,486,000 in the
current year compared to $882,000 in last year's nine month period. Under its
$10,000,000 bank line of credit, the Company increased its bank borrowings to
$5,200,000 at April 30, 1995 from $3,000,000 at July 31, 1994. These borrowings
were used to finance the increase in accounts receivable and inventory, to
purchase fixed assets, and to repurchase shares of the Company's stock under its
prior share repurchase program. As of April 30, 1995, working capital increased
to $14,829,000 from $14,466,000 at July 31, 1994, and the current ratio was 2.6
to 1 compared to 3.0 to 1 at July 31, 1994. The decrease in the current ratio
resulted from increased bank borrowings used to repurchase Company shares and
purchase fixed assets.
The Company believes it can continue to finance its working capital, share
repurchase and capital expenditure needs for the foreseeable future from
internally generated funds and its available bank line of credit.
DISTRIBUTION RIGHTS:
The Company has exclusive distribution rights in the United States, Canada,
Mexico and certain South American countries for the ProImage PosterPrinter under
a distribution agreement with Itochu Corporation (a Japanese trading company).
The Company has met the minimum order requirements under the agreement and
continues to maintain exclusive distribution rights in the noted countries. The
distribution agreement expires December 31, 1995. The Company has non-exclusive
distribution for the 220 volt ProImage in certain international countries,
primarily in Europe, under a letter agreement with Itochu. This letter agreement
incorporates by reference substantially all of the terms and conditions of the
exclusive distribution agreement referred to above.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 27 - Financial Data Schedule (For SEC use only).
(b) Reports on Form 8-K: No reports on Form 8-K have been filed
during the quarter.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: June 9, 1995
VARITRONIC SYSTEMS, INC.
/s/ Norbert F. Nicpon
Norbert F. Nicpon
Vice President of Finance and
Administration and Chief
Financial Officer
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1995
<PERIOD-START> AUG-01-1994
<PERIOD-END> APR-30-1995
<CASH> 299,151
<SECURITIES> 0
<RECEIVABLES> 9,774,982
<ALLOWANCES> 175,000
<INVENTORY> 13,073,947
<CURRENT-ASSETS> 24,088,063
<PP&E> 10,735,241
<DEPRECIATION> 6,035,487
<TOTAL-ASSETS> 28,787,817
<CURRENT-LIABILITIES> 9,258,641
<BONDS> 0
<COMMON> 23,268
0
0
<OTHER-SE> 19,505,908
<TOTAL-LIABILITY-AND-EQUITY> 28,787,817
<SALES> 36,318,384
<TOTAL-REVENUES> 36,318,384
<CGS> 23,215,886
<TOTAL-COSTS> 23,215,886
<OTHER-EXPENSES> 10,567,263
<LOSS-PROVISION> 48,820
<INTEREST-EXPENSE> 233,485
<INCOME-PRETAX> 2,252,930
<INCOME-TAX> 740,000
<INCOME-CONTINUING> 1,512,930
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,512,930
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